I’m Buying A Home From A Foreign Seller: How Does FIRPTA Affect Me?

I’m Buying A Home From A Foreign Seller: How Does FIRPTA Affect Me?

In normal circumstances, buying a home can be a stressful experience. However, when you add in a seller who’s not a United States citizen, it can become even more complicated. To make your real estate transaction go off without a hitch, learn a little bit about the Foreign Investment In Real Property Tax Act (FIRPTA) and what it means for you when you buy a home from a foreign seller.

Explaining FIRPTA

Often abbreviated as FIRPTA, the Foreign Investment In Real Property Tax Act, requires that U.S. buyers purchasing a property from a foreign seller withhold 10% of the sales price as a “tax”. As a buyer, it is your responsibility to identify whether the seller is not a U.S. citizen and subject to the FIRPTA withholding. Failure to comply means that you, as the buyer, could be responsible for the tax.

Since foreign investors in the United States aren’t taxed on most capital gains, requiring the buyer to withhold 10% of the sales price on the seller’s behalf helps ensure that the United States government receives the tax revenue. Without this withholding, the government would have no way to collect this revenue since foreign investors could simply leave the country without paying it.

Buyers will need to report the 10% withholding to the IRS by the 20th day after the date of transfer. If it’s later found that the foreign seller didn’t actually owe this 10% in taxes, he or she can file a tax return with the IRS and wait for a refund.

How A Title Company Can Help You Understand FIRPTA

If FIRPTA sounds confusing, it’s because it is! U.S. tax codes can be quite complicated, which is why it’s important to partner with someone who understands just how FIRPTA and other tax regulations can affect home buyers. Many real estate professionals do have a basic understanding about FIRPTA, especially in a location where foreign real estate transactions are common. However, there are a number of variations that can exempt a buyer from withholding funds for FIRPTA, so it’s vital that your title company and real estate agent are knowledgeable about all the guidelines and exceptions.

If you’re not sure whether you should worry about FIRPTA, talk to an experienced realtor or title company, such as Title Junction. We can help ensure that you’re complying with the strict FIRPTA regulations so that there’s no surprise.

Title Junction offers classes concerning a number of real estate topics, including FIRPTA, HUD1, title commitment and policies, signature requirements and title order process and basics.  Call to schedule your class today!

FIRPTA (Foreign Seller) “Cheat Sheet”

What is FIRPTA?

FIRPTA is the acronym for Foreign Investment in Real Property Tax Act of 1980 that deals with the disposition of a US real property interest by a foreign person or a foreign corporation.

 How do I deal with a FIRPTA transaction?

If the seller is a non-resident alien meaning no social security number or resident alien card (green card).  Proceed as follows:

Property sale price is over $300,000.

     1. Foreign Seller must have a tax ID number or ITIN (Individual Tax Identification Number).  If the seller does not have an ITIN they are to see an IRS approved acceptance agent to fill out a W7 form and bring the original to the title agent.  The original W7 form, a check in the amount of 10% of the sale price, Form 8288 signed by the buyer and a copy of the HUD-1 must be sent to the IRS within 20 days of closing.  If the seller does have an ITIN send a check in the amount of 10% of the sale price, Form 8288 signed by the buyer and a copy of the HUD-1 to the IRS within 20 days of closing.

2. Foreign buyer purchasing from a Foreign Seller- both parties must have an ITIN.  If the buyer does not have an ITIN they are to see an IRS approved acceptance agent to fill out the W7 form, and then bring the original to the title agent.  The original W7 form for the byer must be submitted to the IRS with the documents listed above.

Property sale price is $300,000 and under.

1. The 10% does not have to be withheld if the seller is a non-resident alien and the buyer signs an affidavit stating the purchase price is $300,000 or less, the property will be their personal residence, the buyer or buyer’s family member will occupy the property at least 50% of the number of days the property is in use during each of the first two 12 month periods following the date of purchase and the buyer is a U.S. citizen.

2. If the buyer refuses to sign the affidavit 10% must be withheld and sent to the IRS.  If this is the case follow the same steps for properties over $300,000.

FIRPTA withholding does not apply to anyone who is a US Citizen or a resident alien as they will have a Social Security Number.

 FIRPTA withholding is not a tax, it is just that, a withholding.

The 10% withholding is never taken from the buyer’s funds, it is a seller charge only.  We always suggest the foreign seller seek the advice of an accountant prior to closing.